It is surprising that a number of physicians whoare eligible to participate in their hospital-sponsoredsavings and retirement program fail to doso, despite the benefits and power of taxdeferredgrowth and accumulation in such a program.The reason why many physicians do not participate inthese programs is that they are generally unfamiliarwith the mechanics of how the programs work, theirbenefits, and their investment choices.
Many hospitals offer a 403(b) tax-sheltered annuityprogram whereby the participant is eligible to defer upto a maximum of $13,000 annually ($16,000 annuallyif over age 50) on a pretax basis. Participation in such aprogram will generate tax savings and substantialincome at retirement, all of which will be taxable.
For example, let's say that Dr. Joe Jones is age 35and would like to be in the financial position to retireat age 60. He makes monthly contributions to his hospital'ssponsored 403(b) tax-sheltered annuity programand averages an 8% pretax rate of return on allfees and expenses. Additionally, we will assume thatthe future contributions toward such a plan will beindexed for inflation by 3% annually.
Assuming that Dr. Jones is in a 30% income taxbracket, he will currently defer about $3900 annuallyin income taxes. Therefore, participating in a 403(b)is only costing him a net of $9100 annually, not$13,000, because if he did not participate in the programand received the $13,000 as ordinary income, hewould only have $9100 in after-tax disposableincome. Also, because all monies accumulate taxdeferred,there will be no current taxation on earningsor capital appreciation until such time as he beginswithdrawing an income when he retires.
Under these assumptions, it is projected that Dr.Jones will have accumulated almost $1.14 million byage 60. However, if he delays starting a plan until age40, he will accumulate about $735,000. Waitingthose extra 5 years will cost him around $400,000 inadditional retirement savings and substantially reducehis retirement income stream from $97,500 toabout $63,000 annually. Essentially, Dr. Jones forgoes$932,000 in retirement income over a 25-year timehorizon that would have cost him only about $65,800in pretax income during that initial plan startup period.
With very few exceptions, you are always betteroff taking the tax deduction today and deferring taxesthan paying your taxes upfront today and investingthe difference. If you have the opportunity to participatein a company-sponsored savings and retirementplan, consider starting as soon as possible. In addition,before you consider paying your taxes andinvesting in a variety of taxable and tax-deferredinvestment vehicles, always make use of the tax deferralon current income offered by the many types ofqualified retirement plans available in the marketplace.The type of plan will dictate the terms and conditionsof participation and how much you will beable to defer annually.
Thomas R. Kosky and his partner, Harris L.Kerker, are principals of the Asset Planning Groupin Miami, Fla, specializing in investment, retirement,and estate planning. Mr. Kosky teaches corporatefinance in the Saturday Executive andHealth Care Executive MBA Programs at theUniversity of Miami. He welcomes questions orcomments at 800-953-5508, or visit www.assetplanning.net.